Definition for : Earn-out clause
An earn-out clause links part of the transaction price (during private negotiations) to the acquired company's Future financial performance. The clause can take one of two forms: the buyer takes full control of the target company at a minimum price, which can only be revised upwards; or he buys a portion of the company at a fixed price and the rest at a Future date, with the price dependent on the company's Future Profits. The index can be a multiple of EBIT, EBITDA or pre-tax Profit.
(See Chapter 43 Corporate governance of the Vernimmen)
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